RBI Revisits Commercial Paper Guidelines

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: As part of its consultative process, the Reserve Bank of India (RBI) has released a status paper on commercial paper (CP) inviting comments.

CP is a negotiable short-term unsecured promissory note with fixed maturities issued by well-rated companies. CP is a low cost alternative to bank loans from institutional investors. The last review of the CP guidelines was undertaken in October 2000. Periodically, market participants have suggested various modifications in the guidelines and the RBI has carefully shifted through these suggestions to avoid any mishaps.

When CP was introduced in January 1990, only highly rated corporate borrowers were allowed to issue CP to diversify their short-term borrowings, but over time there has been a diluting of the norms. Initially, CP had a maximum maturity of three-six months, but in 1993 the maximum maturity was raised to less than one year. Subsequently, in 1998, the minimum maturity was reduced to 15 days. Inter-country comparison shows that in the US there is no prescribed maturity period, but as a matter of practice it is limited to 270 days; the most popular period is, however, 1-7 days.

In India, the minimum rating was initially P1+ of CRISIL but was subsequently, softened to P1 (April 1990) and P2 (May 1992). In the UK, US and France rating is not compulsory but generally only the highest rating evinces investor interest.

The eligibility criteria was initially a net worth of a company of Rs 10 crore; this was reduced to Rs 5 crore in 1990 and further to Rs 4 crore in 1993. The organic link between issuance of a CP and the working capital (fund-based) limit was served in 2000 when CP was made a stand alone product. In the UK and the US, there is no limit on the amount of CP that entities may raise.

The denominations have been reduced to Rs 5 lakh and a single investor not less than Rs 5 lakh (face value). While there is no minimum prescribed size of the issue, the minimum denomination in practice is large — in US $100,000, in France euro 1,50,000 and UK euro 40,000.

The stamp duty for banks ranges between 0.012 per cent - 0.4 per cent (depending on maturity) and for non banks between 0.06 per cent to 0.5 per cent. In US, UK and France there is no stamp duty.